Top Justice Department prosecutors are advising Attorney General Janet Reno to seek the appointment of an independent counsel to investigate whether Interior Secretary Bruce Babbitt misled Congress over his handling of a controversial Indian casino license, department officials said yesterday.

Reno had not reached a final decision on the recommendation as of last night, the officials said. Under a statutory deadline, she has until Wednesday to decide how to proceed on the Babbitt case. Reno can also seek a 60-day extension to continue examining the matter.

At issue are Babbitt statements to a Senate committee investigating campaign finance abuses that no political considerations entered into an Interior Department decision to reject a casino application by three impoverished Chippewa tribes in Wisconsin. Babbitt's claim was contradicted in other sworn testimony before the Senate Governmental Affairs Committee and by Babbitt's own accounts of the events elsewhere.

The Chippewa's casino plans were opposed by tribes over the border in Minnesota that operated their own casino. The rival tribes hired prominent Democratic lobbyists to carry their case to the White House and then donated nearly $300,000 to the Democratic National Committee after the Chippewa application was turned down.

Justice Department officials emphasized that a decision to seek an independent counsel would not imply that investigators had found conclusive evidence of wrongdoing. The Independent Counsel Act obliges an attorney general to seek an outside probe if there are allegations against a top executive branch official that cannot be resolved with a preliminary investigation.

In this case, Justice Department officials have concluded that they cannot determine whether to pursue a perjury case against Babbitt without closely examining his motives and the law requires them to leave those subjective judgments to an outside investigator.

Babbitt insists that he is innocent of any wrongdoing and that the apparent contradictions in his statements reflect misunderstandings rather than an attempt to cover-up a political deal.

A key issue under discussion is the kind of mandate that an independent counsel would be granted in this case, officials said. Some senior officials favor a narrow mandate that would limit any investigation to the truthfulness of Babbitt's statements rather than the broader question of whether the 1996 Clinton-Gore reelection effort violated campaign finance laws.

Last November FBI Director Louis J. Freeh urged Reno to seek an independent counsel to investigate the broad range of allegations surrounding Democratic fund-raising in 1996. Some investigators argue that an independent counsel in the Babbitt case could be the starting point for such a broader inquiry because several top DNC and White House officials who played a role in other controversies were also involved in the Chippewa casino matter.